The largest state-owned banks still dominate the top of Russia’s banking system, but high returns, specialisation and consolidation in the private sector are creating signs of change.

Disclosure among Russian banks is steadily improving, and this year’s ranking in The Banker includes 100 banks, up from just 50 two years ago. The inclusion of extra banks does not, however, change the dominance of state-owned giants at the top of the ranking.

And the state banks have been enjoying a good profit performance as well. VTB and Gazprombank suffered losses in 2009 and 2008, respectively, but in 2010 they joined Sberbank to take the top three spots for largest profits, sharing almost 85% of profits among the 10 most profitable banks.

But not all the state sector is performing so well. Russian Agricultural Bank, used as a vehicle for lending to rural borrowers that private banks consider too risky, scraped into a profit of just $24m on total assets of $3.8bn. The bank disclosed non-performing loans of 7.6% in 2010, more than double the rate of 3.2% in 2009, but it remains highly capitalised.

Meanwhile, Bank of Moscow plummeted to a heavy loss following the dismissal of Yuri Luzhkov as mayor of Moscow – the city council was previously the largest shareholder. The bank slides from fifth to 14th in this year’s ranking, as measured by Tier 1 capital. In 2011, control of the bank passed to VTB, requiring a capital injection of $14.4bn as the new owner sought to unravel problem loans allegedly linked to the previous city administration. Its ownership by VTB means Bank of Moscow will be removed from next year’s rankings.

Russian banks top 10 profits

Consumer lending success

The strength of the top three state-owned banks should not detract from good performances in the private sector, among both Russian and foreign-owned banks. The key formula seems to be specialisation, and in particular the unsecured consumer lending model.

Confounding fears when the financial crisis arrived in 2008 that this Western-designed model had not been adequately calibrated to the challenges of the Russian market, three of them – GE Money, Home Credit and OTP – are among the top 10 by return on assets. Two other consumer lending specialists, the Russian subsidiary of BNP Paribas and Orient Express Bank, are among the top 10 fastest growing by assets.

Although the risk management of many of these banks clearly surpassed the expectations of observers, the model is not without weaknesses. Russian Standard, the local pioneer in the field, recovered from a loss in 2009, but it slipped six places in the ranking by Tier 1 capital this year. And most consumer lenders are heavily dependent on wholesale or parent funding – four of the banks among the highest 10 loan-to-deposit (LTD) ratios are consumer lending specialists. Many of these banks have now begun to collect deposits, but they will need to compete with the vast national presence of savings giant Sberbank without building the expensive branch network.

Foreign retrenchment

The sharp reduction in assets at many foreign-owned banks is a major theme this year. While Raiffeisen, Deutsche Bank and Société Générale’s Rosbank deleveraged in 2010, several more foreign banks have exited retail banking altogether over the past 18 months, including HSBC, Barclays and Santander. The last of these sold its operations to fast-growing Orient Express Bank, which had previously bought Morgan Stanley’s credit card business in Russia.

Not every foreign bank is shrinking, however. Citi continues to expand, and one to watch is Nordea. With its Swedish parent at one remove from the eurozone crisis – unlike the three largest foreign-owned subsidiaries – its assets grew by 21% in 2010, following a 70% capital increase the year before.

Another interesting story is BNP Paribas Russia, with a 94% increase in assets. The bank announced that it was spinning off its consumer banking arm in Russia into a joint venture with Sberbank. Given the speed with which this operation had been growing, the joint venture looks more like a means of facilitating further growth at a time of funding constraints, rather than a withdrawal from the Russian market.

Russian banks - top 10 return on assets in 2010

Local expansion

The acquisition strategy of Orient Express also points to another significant trend, with marked consolidation taking place among locally owned players. Other consolidators include Nomos and Otkritie, both among the top 10 fastest growing banks by assets.

One bank stands out, despite not having so far made major acquisitions. Bank Rossiya is the fastest growing by assets, already controls Gazprom’s pension fund asset manager Lider and insurance company Sogaz, and looks poised to break into the top 20 in next year’s rankings.

In September 2011, Bank Rossiya’s management issued a denial that they were in talks to buy Bank St Petersburg – which subsequently received a multilateral capital injection instead. Bank Rossiya’s owners injected fresh capital in 2010, and a very low LTD ratio suggests the bank has derived ample liquidity for expansion from its clients – mostly major oil and gas, metals and financial services companies.

 

Russian banks - tables

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